Reviewing the OECD’s Guidelines for Multinational Enterprises: guiding responsible business conduct in the face of climate change
The OECD’s ‘Guidelines for MNEs’ were last updated in 2011, before the signing of the Paris Agreement and the growing consensus on the need for net-zero greenhouse gas emissions. In this commentary, Joana Setzer, Catherine Higham and Vibha Mohan provide evidence to complement the OECD’s own ‘stocktake’ of the Guidelines by reviewing key developments in understanding of responsible conduct in the climate context.* They draw in particular on important climate litigation cases.
Earlier this year the Organisation for Economic Co-Operation and Development (OECD) published a draft stocktaking report on the implementation of its Guidelines for Multinational Enterprises (MNEs)(‘the Guidelines’). These Guidelines are designed to act as “one of the world’s most authoritative international instruments for responsible and sustainable business”.
As the draft stocktake report acknowledges, the “environmental agenda has evolved significantly since 2011”, which is when the Guidelines were last updated. A key development has been the signing of the Paris Agreement in 2015 and the consequent global consensus on the need for global greenhouse gas emissions to reach ‘net zero’ in the second half of this century. Achieving this goal will require a whole-economy shift, one which, as the report rightly recognises, requires a fundamental rethink of how business and investment decisions are made. The Guidelines do not explicitly mention climate change, but they encourage reporting on greenhouse gas emissions reductions (see Chapter VI 6 (b), (c), (d) and Commentary, paragraph 33).
Adding to this stocktaking exercise, here we take a deeper look at how the Guidelines and the non-judicial dispute resolution mechanism before National Contact Points (NCPs) have been applied to date to the greatest global challenges of our time: climate change, biodiversity loss and environmental degradation.
We review key developments in the broader understanding of responsible business conduct in the climate context. We draw on a range of sources, particularly evidence from the field of climate change litigation, which acts as a critical avenue for the contestation of climate action and inaction, as well as the clarification of policies and legislation. Since 2015, the global body of climate change litigation has more than doubled in size, with a small but significant number of cases brought against corporate actors.
In particular, we assess the nine climate-related NCP complaints brought to date under the Guidelines, which are summarised in the Climate Change Laws of the World database maintained by the Grantham Research Institute. Some of these are referenced in the OECD’s stocktake report but it gives little critical examination to the process and outcomes of these complaints. We highlight inconsistencies in the approaches adopted by NCPs between these and related cases, which strengthens the case for a substantive update to the relevant chapters of the Guidelines, or subsidiary guidance on climate-related issues.
Finally, we provide a short set of recommendations to the OECD Secretariat and the Working Party on Responsible Business Conduct.
Responsible business conduct in the climate context
If the Guidelines are to remain a relevant guide for MNE conduct – and for effective intervention by the NCPs, government-supported offices whose core duty it is to advance the effectiveness of the OECD Guidelines – in the years to come, there are five key issues to which they must be better adapted.
(i) Due diligence in the climate context
Under the Guidelines, corporate due diligence is “the key process for operationalizing” business responsibilities. However, as established by feedback from the NCPs, outlined in the stocktake report, there remains a significant need for greater clarity on what positive due diligence obligations on climate amount to. This need is especially clear when we consider the category of human rights due diligence in the climate context.
The fundamental interlinkage between climate change and human rights has been firmly established, with more than 100 cases being brought before domestic and international courts and tribunals based on human rights grounds. The concept of “human rights due diligence” was incorporated into the Guidelines in 2011. Subsequently the application of this concept to climate change has been confirmed by the work of UN Special Rapporteur on Human Rights and the Environment, David Boyd, in a 2019 report on climate change and human rights, and by the UN Office of the High Commissioner for Human Rights, in a 2020 “key messages” report, as well as by domestic courts and tribunals.
A significant corporate due diligence obligation was recognised in the recent decision by the Hague District Court in the case of Milieudefensie [Friends of the Earth Netherlands] v. Shell, when the Court ordered Shell to reduce its emissions. The Court found the unwritten duty of care under Dutch tort law to be informed by the responsibility to respect human rights that is reflected in the OECD Guidelines.
Recognising the need for further clarity, the UN Working Group on Business and Human Rights is currently developing an Information Note to address this issue. We would urge the OECD to follow suit and provide greater clarity on positive due diligence obligations on climate change.
(ii) Obligations to reduce emissions
The early climate-related NCP complaints, filed before the finalisation of the Paris Agreement in 2015, dealt with specific, substantive emission-reduction obligations. There are two such cases: a complaint by Norwegian Climate Network and Concerned Scientists Norway against Statoil ASA, concerning the incompatibility of oil sands operations with the sustainability provisions of the Guidelines, and a complaint by NGO Germanwatch against Volkswagen, alleging violation of climate obligations. Both complaints were rejected by the respective NCPs on the grounds that the issues raised were outside the scope of the OECD Guidelines.
In rejecting the Norwegian case, the NCP observed that the complaint concerned state conduct and that it lacked particularised allegations against the enterprise; the Complainant did not remedy this when it was suggested by the NCP. In turn, the Volkswagen case was determined before the entry into force of the 2011 Guidelines, and therefore before human rights standards were recorded into the text.
Since these complaints were filed, there has been a significant shift in global understanding of the responsibility to reduce greenhouse gas emissions arising from an enterprise’s operations. Many MNEs now recognise they have an urgent responsibility to develop central emissions reduction policies. This is evidenced by the more than 3,000 companies, including a fifth of FTSE 100 companies, that have joined the UNFCCC’s Race to Zero initiative.
In part, this recognition is based on the more comprehensive understanding of the way in which human rights due diligence obligations in the climate context translate into a requirement to develop Paris Agreement-aligned business plans that has emerged from recent cases such as the Shell case. However, such human rights principles are just one source of this obligation. As the Climate Principles for Enterprises demonstrate, other sources of corporate obligations on climate change can be found in environmental principles such as the polluter pays principle and the precautionary principle, tort law, obligations towards future generations, and international and soft-law. Companies must increasingly understand that these obligations must extend to both direct and value chain emissions for which they may be responsible.
While litigation concerning companies’ contributions to emissions has focused on a small group of major emitters from the energy sector, more recently this has expanded to include companies in other high-emitting industries, such as meat and dairy. Reflecting the changes in the international context since the early complaints to NCPs on emissions reductions were decided, more recent related complaints filed before NCPs have been treated differently (as we shall see below). As these more recent cases demonstrate, the Guidelines in their current form can and should be interpreted in a way that aligns with the goals of the Paris Agreement.
However, as the feedback from NCPs summarised in the stocktaking report suggests, more detailed guidance on this alignment and the interpretation of climate obligations in light of the Paris Agreement and the other norms discussed above will help achieve consistency in the way complaints concerning emissions reductions are handled, and better assure alignment with the Paris temperature targets.
(iii) Disclosure obligations
In contrast with the cases concerning substantive emission-reduction obligations described above, recent assessments by NCPs have been more progressive in how they consider the need for credit and finance agencies to address their due diligence and disclosure obligations in the climate context.
In the broader environmental context, NCPs have been clear that financial institutions are required to actively engage with the potential environmental impacts of the projects and organisations to which they provide services. For example, the Dutch NCP, deliberating on the submission against Rabobank by Friends of the Earth Europe and Netherlands, noted that the disengagement of financial institutions like the Rabobank is not favourable to the goal of sustainability. The NCP further emphasised the value of constructive due diligence in the financial sector. This finds resonance in the specific instance against Atradius Dutch State Business.
Disclosure by MNEs is integral to public understanding of corporate operations and their social, economic and environmental impacts. For instance, the Polish NCP has assessed the specific instance against the financial institution PZU regarding the adverse effect of its provisions of finance to companies involved in coal mining. The NCP highlighted a lack of transparency and recommended that PZU continue to honour its commitments relating to disclosing relevant non-financial information.
Other cases have moved beyond the issue of transparency and engagement and are starting to tackle questions regarding substantive emission-reduction obligations for indirect greenhouse gas emissions:
- The Dutch NCP has led the way by recognising that financial institutions are required by the OECD Guidelines to work towards setting emissions reduction targets in line with the Paris Agreement. In the specific instance against ING Bank, the NCP’s submission alleged that although ING reported on its direct greenhouse gas emissions, it failed to report on the indirect emissions resulting from its investments. ING had also failed to set concrete emissions reduction targets for its indirect emissions. The final assessment by the NCP is an excellent example of an updated understanding of international climate obligations and a purposive application of the Guidelines, where it had been alleged that ING was in breach of the disclosure, environment and consumer interest provisions of the Guidelines.
- The Australian NCP has also adopted a progressive approach in admitting the specific instance against ANZ bank after a preliminary assessment. The submission alleges that ANZ bank has failed to adhere to emission reduction commitments under the Paris Agreement and has not disclosed the extent of the emissions resulting from its lending activities.
- A complaint against the UK Export Credit Agency, submitted by Global Witness in March 2020, alleged breach of disclosure obligations under the Guidelines by not disclosing indirect emissions and failing to comply with the climate target under the Paris Agreement. However, rather than proceeding to the substantive issues in the complaint, the UK NCP rejected the submission on the basis that the UK export credit agency does not fit the description of a ‘multinational enterprise’ under the Guidelines. This decision contrasts with the approach of the Dutch and Korean NCPs, highlighting a clear lack of clarity about the scope of the Guidelines.
- Submitted in 2018, a specific instance against Sumitomo Mitsui Banking Corporation, Mitsubishi UFJ Financial Group and Mizuho Financial Group concerns the financing of coal power plants by Japanese banks in Vietnam. It is yet to be seen whether the Japanese NCP will take the same progressive approach as the Dutch and the Australian NCP.
These cases illustrate the start of a conversation about transparency, disclosure, emissions reduction targets and value chain emissions that requires further, urgent attention. They also reflect both the efforts of and pressure on the financial sector to align investment portfolios with the goals of the Paris Agreement. As well as clarifying the scope of transparency obligations, a review of the Guidelines through a climate lens could address questions regarding the responsibility to mitigate value chain emissions for both the financial sector – perhaps through sector-specific guidance – and for the wider corporate community.
(iv) Greenwashing and misinformation
The issue of accurate provision of climate-relevant information by MNEs has arisen not only in the context of disclosure obligations, but also in the context of growing global concern over the phenomenon of ‘greenwashing’.
A specific instance against BP filed before the UK NCP by ClientEarth in 2019 questioned the accuracy of statements made by the company in advertising campaigns focused on its renewable energy operations. It alleged, for example, that the advertisements obscured the company’s broader contributions to climate and environmental impacts. The case was initially accepted on the basis that the issues were material and substantiated. However, ultimately it was discontinued by the UK NCP after BP withdrew the advertisements and undertook not to replace them and to stop corporate reputation advertising campaigns. The discontinuation of this case means that there has not yet been a final assessment applying the Consumer Protection and Environment chapters of the Guidelines to greenwashing.
The complaint against BP reflects broader trends in climate change litigation against private sector actors, much of which is centred on the provision of information – or indeed disinformation – to shareholders and consumers. Such disinformation is often highly damaging to climate action, with impacts on both political consensus and behavioural change at the individual level. Current litigation of this nature includes both challenges by shareholders centred on misrepresentation of climate risks and challenges by sub-national governments and others centred on misleading advertising under consumer protection laws.
Disinformation-centred complaints are likely to increase in the coming years, particularly in light of growing concerns about greenwashing among companies making ‘net zero’ commitments that may not be backed up by robust, credible emissions reduction plans. This was recently seen in the first-of-its-kind case of Australian Centre for Corporate Responsibility v. Santos Ltd.
In the stocktaking report, NCPs highlight the need for clarity on questions regarding climate performance and double materiality when reflecting on the challenges posed by the Disclosure chapter of the Guidelines. We echo that point. As companies continue to adopt net-zero commitments and as climate risk reporting becomes ever more mainstream there is an urgent need to ensure that companies, governments and NCPs are better equipped with the means to guard against further promotion of false or misleading information to both investors and consumers.
(v) Climate change adaptation and resilience
One issue that receives only passing reference in the stocktaking report is the responsibility of businesses with regard to climate change adaptation. Yet there is evidence from the current body of climate litigation that highlights the need for MNEs to seriously engage with the adaptation and resilience agenda. For example, Conservation Law Foundation v. Exxon Mobil concerns the risk posed to local communities by Exxon’s failure to adapt a petroleum storage and distribution terminal to respond to foreseeable extreme weather events. Cases like this demonstrate the urgent need for companies to understand and address how physical climate impacts might affect both their own operations and their value chains.
We urge the OECD in its stocktaking to consider businesses’ responsibilities around climate adaptation; the revision of the Guidelines should make explicit the need for companies to consider climate impacts.
Conclusion and recommendations
The OECD already publishes an extensive annual report on the activities undertaken to promote the effective implementation of the Guidelines, analysing specific instances and examining the dispositions of NCPs. Rather than duplicating those efforts, we have intended with this commentary to supplement them by presenting a high-level review of cases most relevant in the climate context. The Guidelines are a living instrument, and can and should be interpreted in light of broader trends in international law. The evidence here shows that while this is starting to happen, there are still a number of open questions that could benefit from further clarification.
The evidence we have assessed suggests that, in their current form, the OECD Guidelines have the potential to play a significant role in the governance of corporate conduct in the climate context. The pre-Paris view that the Guidelines had limited relevance to climate change has shifted such that the NCPs are now taking a more purposive and progressive approach in many disclosure-related cases.
However, this purposive approach currently relies on international norms and standards to fill the gaps created by an absence of clear and explicit text in the Guidelines and detailed supplementary guidance. There is thus a real danger that this approach will not be followed in all cases. As the number of climate-focused specific instances rises in the years to come – which seems almost inevitable given the major growth of climate litigation across the board – this could lead to real risks to the credibility of the Guidelines and the NCPs.
To avoid this situation, we recommend the following:
- The stocktaking report should be updated to include more specific references to the issues set out above.
- The Working Group should initiate a process to review and revise the text of the Guidelines themselves, to better incorporate the five issues discussed above. Particular consideration should be given to the chapters on Environment, Human Rights, Disclosure, and Consumer Protection.
- Supplementary Guidance on the application of the Guidelines in the climate context should be developed, with further sectoral guidance to follow, starting with guidance for the financial services industry.
- Key stakeholders, starting with the NCPs, should be offered dedicated training to better equip them to address the issues. This should include training on climate science and climate change economics, and on the latest trends in climate change law and litigation.
*The authors would like to thank Tim Cooke-Hurle of Doughty Street Chambers and Johnathan White and Sophie Marjanac of ClientEarth for their thoughtful reviews of earlier drafts of this commentary